Call It Motley Foolishness

BOOKS

February 14, 1999|By LANE KELLEY Staff Writer

The founders of the popular Motley Fool investment Web site have been playing hide-and-seek in disclosing their relationship with America Online.

Brothers David and Tom Gardner positively drool over what a great stock the online giant is in their latest book, because it's a "rule breaker" as they call it. But there's not a peep in The Motley Fool's Rule Breakers, Rule Makers, or in their two previous tomes, about the Fool's business deals with AOL.

Only their fellow Fools know about that arrangement, which is explained in a frequently-asked-questions area of the Web site: AOL doled out "seed money" to the Gardners -- reported to be $500,000 by a trade journal -- when the Fool was starting up in 1995. The online giant also has an option to buy up to 20 percent of the Fools' company, the statement says.

So they come clean on the Web site, which is free, but avoid disclosure in their books, which are not free and have made the Gardner brothers a bundle. AOL also confirmed its deal with the Fools.

The authors couldn't be reached because they were on a book tour, but a Fool spokesman at their headquarters in Alexandria, Va., said he thinks the founders consider the Web site statement to be a once-is-enough disclosure.

"I'm just guessing," said spokesman Chris Hill, "but I think their attitude is, `We've gone over this before and do we need to mention it every time we talk about AOL?'"

Disclosing the arrangement only online is not enough for everyone, says Bob Steele, director of the ethics program at the Poynter Institute in St. Petersburg, a nonprofit research and study center for journalists.

"To put that on the Web site does not provide the disclosure that is necessary for readers of the book," Steele said. "That's a pretty haphazard way of being ethically honest."

One obvious place for the disclosure in the book would have been in Chapter 7, where David Gardner said he watched AOL's stock quadruple before he finally "knuckled under" and bought it in 1994. This was when the stock was still selling for a few bucks a share. Small wonder that he calls AOL, now priced at about $150 a share, "my best investment ever."

One sentence, maybe just a footnote, about The Motley Fool's AOL connection might have been enough at that point. Then again, some readers might think it would be hard to avoid becoming paid shills for the company because of the seed money. Or as the Fools themselves put the question on their Web site:

"You are always singing the praises of America Online -- how can we believe you when you not only own the stock, but also have a business relationship with the company?"

The Fools' answer? Trust us.

"We hold honor far above even performance," the statement says. "This is a point of honor about which we can only ask the skeptic's trust. Some will always want to impugn our honor, but that's something we've come to live with; we'll let the analysis and the numbers speak for our part."

Some stock analysts, especially those who emulate billionaire investor Warren Buffett and his teacher, Ben Graham, will scratch their heads over some of the analysis in the Gardners' new book.

The Fool brothers sing the praises not only of AOL but of some Internet wonder stocks -- Amazon.com and Yahoo! for example -- that have sky-high price-to-earnings ratios and practically nonexistent earnings.

Yet you have to understand that, in Fooldom, making money is the job of "rule makers" like Microsoft, Coca-Cola, Pfizer, Gap -- and AOL. Some analysts might note that AOL doesn't have as long a track record as those other companies at producing earnings.

Rule breakers, like Amazon.com, are the Columbuses of Wall Street, creating new industries (online in most cases) and building a future through smart management, shrewd marketing and a confidence that the earnings will show up eventually.

You can make a fortune overnight with these stocks, but David Gardner also warns that you can go bust, too. How do you find them? He provides a checklist, but acknowledges that finding the monster stocks is "something of an art" and not something you can do by focusing on traditional stock-picking standards.

"When it comes to Rule Breakers, you should ignore conventional valuation altogether," he writes.

Nevertheless, the Fools' new book provides plenty of what they do best, which is investment analysis that is just a hoot to read, whether you agree with them or not.

The Gardners create their own investment language, a glossary not only of Rule Breakers and Rule Makers but also of Faker Breakers and Tweeners, of companies in the throes of the death rattle and investors who live in the Land of Mo -- as in momentum investors, who buy only hot stocks.

Few writers would even dare, let alone know how, to base an investment book on a Shakespeare play -- each chapter has an epigram from Henry IV. These authors also throw in cogent analogies that refer to Andy Warhol, 17th century author Robert Burton, singer Kenny Rogers, physicist Stephen Hawking and novelist Patrick O'Brian, to name just a few.

In subsequent editions the brothers should correct a few mistakes, such as putting Walt Disney Co.'s headquarters in Orlando instead of in Burbank, Calif. Their book readers would also be further educated if the Fools included that disclosure about AOL in their books, not just on their Web site.